SEC’s RoboCop to Patrol Filings for Accounting Fraud

In a July press release, the SEC announced that its Division of Enforcement would be bolstering its technology and analytical capacity to focus on high-risk areas of the market. Specifically, the SEC formed the Financial Reporting and Audit Task Force, a unit dedicated to detecting fraudulent or improper financial reporting, armed with a new Accounting Quality Model (“AQM” or “RoboCop”).

Newly appointed SEC Chairman Mary Jo White is banking on RoboCop to comb through corporate filings for “risk indicators,” factors that are directly associated with earnings management. The AQM also compares corporate filings its industry peer group filings, and reports a fraud probability score. Select filers are then further investigated for fraud by SEC enforcement teams.

“I think financial-statement fraud, accounting fraud has always been important to the SEC,” Ms. White said during a June interview. “It’s certainly an area that I’m interested in and you’re going to see more targeted resources in that area going forward.”

The architect of RoboCop is Craig Lewis, the Chief Economist and Director of the Division of Risk, Strategy, and Financial Innovation at the SEC. Mr. Lewis indicated that risk indicators may include filing delays, changes in auditors, or a high proportion of transactions structured as “off-balance sheet.”

“So what we’re doing is taking the MD&A [Management Discussion & Analysis] section, we’re comparing them to other firms in the same industry group, and we’re finding that in the past, fraudsters have tended to talk a lot about things that really don’t matter much and they under-report all the risks that all the other firms that aren’t having these same issues talk quite a bit about,” stated Lewis.

The SEC has also indicated that it plans to use the risk scores to evaluate the approximately 30,000 tips, complaints, and referrals submissions it expects to receive each year through its Electronic Data Collection Systems or completed Tip, Complaint or Referral forms (Form TCR).

This entry was posted on Monday, August 19th, 2013 at 10:32 pm and is filed under WT Blog.
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